Target Expected - Rate of Returns

gtamm

Is there a way to update the default Target Expected Rate of Returns for Bonds, Large, Small, International, Cash, Other and Unclassified in the Investing/Allocation Section.

Would the current rates include dividend reinvestment.

Boatnmaniac

No way that I know of.  The targets used by Quicken are taken from industry benchmarks for each type of investment and that is not something we control. 

This tool is primarily intended to help you set your allocations target based upon your risk tolerance investment strategy and then to let you know how well your actual portfolio current allocations align with your targets so you can know if you might need/want to make adjustments to your actual portfolio.  It is not a tool that projects into the future what your portfolio will look like...it is simply a snapshot of your current situation.

The "Expected Return" numbers are intended to show how your targeted and actual allocations might compare to each other relative to the benchmarks.  All it really does is to help one determine what the appropriate target allocations should be from a risk/benefit perspective and to show how your actual allocations deviate from that and what the potential impact might be.

Jim_Harman

The Expected Return and Expected Risk on the Investing > Allocations page depend on the target allocations you have set above. This is calculated by Quicken and AFAIK thee is no way to change the algorithm. I believe the algorithm is updated from time to time. You could probably figure it out by setting your target allocation to 100% of each asset class one at a time and looking at the resulting expected risk and return.

It is not clear, however,  what you want to change. To change the target allocations, click on Change Target below the Target pie chart.

q_lurker

Jim_Harman said:

The Expected Return and Expected Risk on the Investing > Allocations page depend on the target allocations you have set above. This is calculated by Quicken and AFAIK thee is no way to change the algorithm. 

I agree.

I believe the algorithm is updated from time to time.

Hmmm.  I would not have though so.  Your basis?  Maybe once a decade?

You could probably figure it out by setting your target allocation to 100% of each asset class one at a time and looking at the resulting expected risk and return.

I went through that exercise and got the following results

Asset Class   Return   Risk
Dom Bonds       2%       5%
Glob Bonds      Unknown
Lg Cap Stk        7%       16%
Sml Cap Stk      8%        20%
Int'l Stk              8%        18%
Cash                 0              0
Other                Unknown
Unclassified      Unknown

When I applied a target set for those 5 classes with values, the Return % predicted for the target matched a weighted average of those 5.  The predicted RISK for the target did not match a simple weighted average.  (Averaging the standard deviations (risk) must have some other mathematical basis I have not chased down.)  I don't know what happens if you target to any of the three "unknown" return/risk classes. 

Since the return/risk values are only available for 5 of the 8 asset classes, and Cash is 0/0%, I've got to question the overall accuracy of this prediction model. 

Off topic:  Note also, I've long had the belief that this very calculation is the reason the program has never had the Asset Class definitions expanded beyond the set of 8 fixed classes.  If users define "other" classes (mid-caps, Hedge funds, whatever else), this calculation just gets worse.

Jim_Harman

Modern Portfolio Theory, pioneered by Markowitz in 1952, says that the overall risk of a portfolio is actually less than the weighted risk of its asset classes to the extent that the returns of the classes are not correlated. Here is a summary:
https://en.wikipedia.org/wiki/Modern_portfolio_theory

Up until a few years ago, Quicken included an asset allocation tool with data from the Newport Group that would recommend different allocations based on your investing horizon and risk tolerance. This was discussed here
https://community.quicken.com/discussion/7552809/how-often-is-quicken-investment-advice-updated

A variety of good calculators are available online, or you can study the asset mix of your favorite target date fund to see what the experts currently recommend.

q_lurker

@Jim_Harman The current Asset Allocation Guide still makes reference to the Newport Group as the basis for the return / risk evaluation.

Jim_Harman

@q-lurker, You're right, but there used to be a more informative guide, with sample allocations.

Perhaps Quicken's current intent is that you use the Portfolio X-ray (US only, Premier and up only) which provides some guidance on the balance and riskiness of your portfolio but does offer an expected return. Note that this analysis does not include any securities that are not publicly traded.

gtamm

The Morningstar X-ray is helpful, and very detailed, but it doesn't provide expected rate of returns. The question on what the percentages or ROR is not what you would find in historical benchmark (i.e, Large Cap 7% verse Historical Average of 10% for S&P 500 Index Fund. Bond Index Fund historically delivery 5.5%. Maybe the ROR are net of Inflation.

My sense it the ROR are low, hence the allocation is Low. Vanguard has done some reporting on 1926-2019 ROR and Inflation that is a good baseline to use in portfolio management.

Jim_Harman

I would guess that Quicken is avoiding anything forward-looking, to avoid legal issues if things do not go according to plan.

The Lifetime Planner lets you set various parameters in its model, which is helpful.